Investors cool over Modi economic plans

India’s premier wants to turn his country into an industrial giant, but investors have yet to be convinced, writes Henry Burrows of consultancy Alaco.

Not long after coming to power in May 2014, India’s prime minister Narendra Modi, standing in front of a huge graphic of a lion composed of interlocking cogs, launched his ambitious Make in India campaign. It was his visionary, reputation-affirming ‘big idea’, aimed at turning the country into a global manufacturing powerhouse.

Mr Modi urged foreign investors to tap India’s undoubted industrial potential in order to create new jobs, end the brain drain and promote growth. In the heady months that followed his election victory, he and his team announced their desire for grand infrastructure projects across India, comprising smart cities, industrial corridors and hints of a public transport revolution.

A cornerstone of the campaign has been to rejuvenate the much-touted Delhi-Mumbai Industrial Corridor (DMIC), an enormously ambitious hi-tech zone spread over six states. Yet despite impressive initial FDI in the wake of the Bharatiya Janata Party’s (BJP) stunning election victory in 2014, subsequent investment in the plan – billed as the world’s largest infrastructure project – has been scarce. Reports of land acquisition issues, approval delays and site abandonment continue to overshadow progress and reinforce criticism of what is an overwhelming undertaking.

There is no doubt that the grandiosity of Mr Modi’s infrastructure programme has its challenges. The DMIC – set for completion in 2037 – is expected to cost $90bn. Its sister programme, the Sagar Mala Project, a massive $120bn port development and coastal regeneration plan, is not due to be finalised for another 17 years. Both projects are already experiencing substantial capital shortfalls among private investors, from whom the government hopes to extract approximately 90% of total funding requirements.

Hesitation among investors is due in part to difficulties in envisaging returns on projects with such drawn-out timeframes, particularly given the magnitude and complexity of plans. More to the point, the projects will have seen several election cycles by the time they are slated to come online. As the BJP gears up to go to the polls in late 2019, Mr Modi must therefore demonstrate sufficient progress to offset disquiet over the industrialisation of rural and coastal India and satisfy investors that infrastructure plans remain central to BJP policy.

Recent elections in Karnataka – which saw the BJP rack up impressive voting numbers, despite missing out on an overall majority and control of the state – suggest things remain positive. India’s economy is zipping along at a relatively healthy seven per cent. This comes even after a dip early last year caused by the chaos that followed the sudden demonetisation announcement, an audacious reform enacted to squeeze the country’s tax revenue-draining informal economy and clamp down on widespread corruption.

As with India’s infrastructure plans, the jury is still out on whether demonetisation – the removal of high-value notes from circulation – will significantly improve India’s finances in the long term. Tax receipts are up, but there are lingering problems, with the media full of stories about cash shortages shuttering ATMs and a huge spike in fake notes as people learn to game the system once again. In truth, it is still too early to make clear judgements about the efficacy of the measure and another key reform, a unified national sales tax, aimed at improving inter-state commerce.

As a result, the Modi government is at a crucial juncture. With elections next year, voters will need to see that the premier’s key policy decisions are bearing fruit. Equally, the BJP is desperate to retain its parliamentary majority in order to move rapidly and unilaterally on big policy decisions.

The opposition, the Indian National Congress, knows all too well the pitfalls of government by consensus. In power for much of India’s history, Congress lost sensationally to Mr Modi in 2014 in part because it was paralysed by in-fighting and hamstrung by divisive factional politics within its coalition, the United Progressive Alliance.

The unfortunate answer to India’s legislative paralysis has often been horse-trading and compromise in the parliament, which has diluted policy effectiveness. The ultra-driven Mr Modi, with his cabal of advisers and his unprecedented majority in parliament, faces the same fate should he prove unable to offer the electorate tangible evidence of progress.

Congress will certainly look to make capital from any potential shortcomings, and there is no doubt that Mr Modi will come out fighting. He must defend his record on corruption, which has thus far received mixed reviews in the Indian press. However, the biggest challenge may prove to be his vast infrastructure plans, and whether his multi-decade goals can resonate with an electorate grappling with more short-term needs.

Henry Burrows is a senior associate at Alaco, a London-based business intelligence consultancy.

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